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Study And Analysis Of Thailand's Developing Economy

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Autor:   •  March 7, 2011  •  2,255 Words (10 Pages)  •  533 Views

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Study and Analysis of Thailand's Developing Economy

The economy of Thailand, until recently, has been the model of progress and growth in southeast Asia. At present, the Thai economy is slowly recovering from the recent regional downturn. However, much of Thailand's economic trouble could have been avoided. The problems encountered will be outlined in order to provide a model of what not to do in a similar situation.

Thailand's recent history has been one continuos trend of GDP growth. In the 1950's, the Thai economy managed to grow at an average rate of approximately 5% per year. By the mid 1960's, the average annual rate of output growth had increased to 8.4%. Due to the sharply increasing petroleum prices in the 1970's, Thailand's growth slowed temporarily, in part due to heavy dependency on oil as a fuel source. By the late 70's, aggregate output in Thailand had increased to the point that average growth per year was near 7% (Muscat, 2-3). It must be noted, nonetheless, that some of this amazing economic growth was due to U.S. subsidies, given to help Thailand combat the illegal narcotics trade (Muscat, 251).

In the 1980's, Thailand saw continued expansion of its output, but this is largely due to the sectoral shifts taking place in the Thai economy. Historically, Thailand has depended on the export of primary goods such as rice, natural rubber, corn and sugar. In the late 70's and early 80's, industry (particularly textiles) had begun to significantly contribute to aggregate output, as had tourism (Muscat, 3&191). The export of staple crops has enjoyed protection of the government in that Thai regulations ensure that domestic demand for these items has been met before any exports can be made (http://www.eximworld.com/ti-bcc/ibp/eft/eft_iecl.htm)

The real trouble for Thailand began in the late 1980's and early 1990's. While the government had always followed stringent guidelines regarding debt structure for the public sector, the private sector was under no such obligation. Hungry for foreign funds to finance the acquisition of capital goods with which to enhance production, private firms increased borrowing at a rapid rate. This was, in part, made possible by the inception of the Bangkok International Banking Facility, which made transactions in foreign currency accounts much easier. In 1990, net capital inflow to Thailand was 8% of GDP and by 1995, the figure had grown to 14%. Another contributing factor was the mismatch in the timing of industrial projects. That is to say that many Thai firms used short-term debt, often in excess of their net capital holdings, to finance long-term projects. As a result, debt began to accumulate rapidly over a short time (Sussangkarn, 1-2).

Yet another symptom of Thailand's economic infirmity was the loss of comparative advantage in labor-intensive industries and an increasingly unfavorable balance of trade. Exports of many significant items had been on the decline, while imports of capital goods, as well as raw materials and intermediate goods were at an all time high (Sussangkarn, 2). The productivity of labor in agriculture (an important source of export revenue) had been decreasing at a faster rate than the increase of the same in other sectors of the economy. This problem, however, had been around for decades. Indeed, Muscat quotes a 1970 report by the World Bank, referring to Thailand:

"The relatively slow growth of agriculture and the concentration of new economic activity in Bangkok have widened the gap between urban and rural income, which was already substantial at the outset. (192)"

The attrition in the rural labor force, while closing the income gap somewhat over time, has resulted in increasingly lower productivity in the agricultural sector.

Thailand's currency, the baht, had been strong for a number of years as a result of being strongly tied to the U.S. dollar. Foreign reserves had been on the increase, from about $16.5 billion in 1990 to approximately $46.5 in 1995. While this increase was encouraging, at least on the surface, it merely masked a deeper problem. Due to the fact that a large part of this increase was a direct result of the large inflow of foreign-held debt, the Thai economy was really in a very precarious position. Should a confidence in Thailand's economy suddenly drop, a large amount of that foreign reserve would literally disappear (Sussangkarn, 2-3).

In the latter part of this decade, that is exactly what occurred. Currency speculation (against the baht) started to undermine the value of the baht and the situation quickly snowballed. The Bank of Thailand was forced to used up a large portion of foreign reserves to shore up the failing baht. Over $23 billion dollars in reserves were spent by 1997 in purchasing bahts in an attempt to raise currency value. In the end, this measure failed. Faced with a massive amount of short-term foreign debt, the Bank of Thailand was forced to ask for IMF assistance in July of 1997 (Sussangkarn, 3).

The purpose of this paper is to demonstrate that the economic problems encountered by Thailand in the latter part of this decade have not crippled the Thai economy. While modeling Thailand's recent growth, special attention will be paid to the factors that led to the crisis. In addition, Thailand's current efforts toward recovery and IMF intervention will be discussed.

In order to identify the underlying causes of Thailand's crisis, it is necessary to understand the reasons for its rapid economic growth. According to the Solow Growth Model, the growth of labor is the limiting factor for overall GDP growth. As the amount of capital increases, the marginal productivity of capital diminishes and overall output growth decreases. These will continue to do so until they equal the rate of labor growth (Kasliwal, 110-112). With a steadily increasing population, and a decreasing rate of unemployment, the labor force in Thailand grew substantially in the 1980's and 90's (Asian Development Bank, thaoth.htm).

For this paper, I will use the model of a small, open economy as described by N. Gregory Mankiw in his book Macroeconomics (4th ed.). There are three basic assumptions:

1) The output growth of an economy can be described as fixed and a function of labor and capital, both of which grow at a fixed rate, as described above.

2) Consumption is positively related to disposable income.

3) Investment is negatively related to the [real] interest rate.

Thailand fits into this model in that while it does engage in international trade,

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